After keeping MSMEs away from the product-Linked scheme and receiving flak for it from all sides, the government is now planning to roll out a modified production-linked incentive scheme along with incentives for exports and employment generation for small and medium enterprises. The move is aimed at incentivizing small units in the MSME category to scale up operations to move into the medium category and generate more employment while integrating them with the global value chain.
Introduction
MSMEs are the backbone of the Indian economy, contributing approximately 30% of the country’s GDP (Gross Domestic Product), 45% of manufacturing output and providing employment to 11 crores of India’s population. But in its previous scheme the MSME were clearly ignored, and as of now the centre is trying to redo the dent done.
Now the Union government plans to launch a revised production-linked incentive (PLI) scheme combined with incentives for employment generation and exports for medium-sized enterprises.
The goal is to encourage small firms in the micro, small and medium enterprises (MSME) segment to expand their business operations and transition into the medium category, creating more job opportunities and integrating them into the global value chain. The plan is to boost the number of medium enterprises in India, currently only 0.01 per cent of total MSMEs.
NITI Aayog is developing a policy framework to include medium-sized units from engineering, electrical, chemical, and pharmaceutical sectors. The government believes that the existing MSME policy requires adjustments, such as a revised production-linked incentive scheme and specific sector-based incentives, to enable units to grow and transition to medium category.
In March 2020, the government launched three PLI schemes for food processing, electronic products, pharma, and networking products. The number of schemes expanded later, reaching a total of 14.
The Federation of Indian Micro and Small and Medium Enterprises, suggested incentivizing medium-sized enterprises to expand to generate employment in India and proposed a dedicated PLI scheme or other incentives, as the current PLI scheme focuses on capital incentive manufacturing, which is automated.
Why were MSMEs left out of PLI Scheme?
PLI Scheme implement initially had discriminated against the MSME sector over product category. It was important that MSMEs should be given the opportunity to participate in the PLI Scheme for all products and not be limited to only Innovative/ Organic Products. The reason is that this restriction was very narrow and practically pushes MSMEs out of the ambit of the Scheme.
Restriction of Innovative/Organic Products for MSMEs is discriminatory & impractical. It is not the purpose of the Scheme, or Government’s intention, to control who makes what item. If Innovative/Organic Products have to be promoted, the large players should be the first ones to do it using their technical skills. The Scheme is proposing the opposite.
The PLI scheme guidelines state that only big companies can set up new production lines, while eligible companies can use the scheme to produce eligible products. However, MSMEs cannot participate in the scheme, as it aims for new capital induction. Strengthening the MSME sector can help reduce perishable agri-produce wastage, and excluding them from this crucial scheme would be counterproductive. Strengthening the MSME sector could help reduce widespread wastage and promote new capital induction.
The range of foods covered by the Scheme should be widened to harness the wide potential of the agri-food sector and to increase the farmers’ income. The Scheme is currently structured for large units and should be modified for the MSME sector as a separate dedicated Scheme, as also reported in a section of the media.
Moreover, many MSME food processing units in the country are currently under-utilized and their spare capacity can be filled up with the help of the PLI Scheme. The proposed turnover and investment levels need to be lowered, for greater feasibility of the Scheme and getting better results. Moreover, the investments made by the units in the last two years (2019-20, 2020-21) may be considered for calculating Scheme eligibility.
The MSME sector is the second-largest employment creator, providing employment to an estimated 11 crore people. It contributes to 30 percent of the GDP and accounts for 48 percent exports. Still, the existing PLI schemes were meant only for the corporates, but if govt wants self-reliance in manufacturing, it is a must to add MSME in this scheme, they argue.
Unfortunately earlier there was no proposal under consideration for a dedicated PLI (Production Linked Incentive) scheme for the MSME sector and Small & Medium Enterprises (MSME). Under the PLI scheme, incentives were given to companies on the incremental sale of products manufactured in the domestic units.
Apart from inviting foreign companies to set up manufacturing units in the country, the scheme also encouraged local companies to expand production and manufacturing in India. Furthermore, the scheme is expected to cut down import bills, reduce dependency on China and absorb the country’s growing workforce.
Yet if the government wants to accentuate Atmanirbharta (self-reliance) in manufacturing, it must announce a PLI scheme for MSMEs, which are into manufacturing. India has a huge import bill, and a dedicated PLI is the best option to offset it as it would not only cut imports, but also create more jobs.
The inclusion of traders in MSMEs would only encourage imports. So until an incentive is provided, units would prefer to import instead of producing. So far the PLIs announced are aimed only at large corporates, which anyway enjoy a lot of benefits in the form of tax breaks, etc.
All India Council of Association (AICA) of MSMEs, which represents 170 MSME associations across the country, said that given that MSMEs are vast and present across sectors, the government can consider bringing a similar scheme to MSMEs.
The government should look at bringing a similar scheme to PLI where MSMEs are given incentives based on the employment generation and the import substitution they do which is what the PLI does. The government should consider a PLI scheme for MSMEs as this is where the bulk of manufacturing happens. A lot of MSME associations are keen and have expressed interest to the government that PLI schemes should be announced for small units as it would not lead to job creation but also give a boost to exports.
There is no denying that the pandemic had brought a body blow to many small businesses in the last two years. Almost all MSMEs want an increase in budgetary outlay to the sector. This, the entrepreneurs say, is urgently needed to combat the disruptions put in by pandemic that destabilized their supply chain. Notably, the government’s budget allocation for 2021-22 for MSMEs was Rs 15,700 crore vis-à-vis Rs 7,572 crore in 2020-21. But red tape and bureaucracy niggles, the industry says, keep a significant chunk of the benefits from reaching micro-units, which constitute 99% of all MSMEs. Industry observers also highlight the need for specific schemes. They say the financial institutions still do not treat them fairly.
The government’s flagship Production Linked Incentive (PLI)-scheme was only for large investors. The government should introduce a similar incentive programme for SMEs. The segment cannot be overlooked as it is a growth engine of the Indian economy. It holds immense significance among India’s industrial sectors; employs 40% of the country’s workforce; contributes 30% of GDP and is responsible for 50% of the country’s exports.
Moreover, it has numerous informal players. The country’s MSMEs base is also the largest after China’s. The Federation of Indian Micro and Small & Medium Enterprises (FISME) said that there has to be specific measures for MSMEs.
The industry body opines that the pandemic has adversely impacted SMEs, and many accounts turned non-performing assets (NPAs) even with an extended NPA classification from 90 days to 180 days. As the security and collateral remains usually fully used in MSMEs, the inability of the promoter to bring in additional security during restructuring becomes a serious handicap.
While measures like the Emergency Credit Line Guarantee Scheme (ECLGS) helped many MSMEs, several of them have remained outside the support system, so inclusion of MSME in PLI scheme could prove to be a game changer by bringing true ease of doing business.
Production Linked Incentive Scheme: How does it aim to drive India’s economic growth?
The Union Budget 2023-24 has allocated ₹8,083 crore for various production linked incentive schemes. The amount is a three-fold jump from the revised budget estimate of ₹2616 crore for these schemes in FY22-23. The bulk of this money will be used for large-scale electronics manufacturing, which includes mobile devices, pharma, auto and auto components, and food processing.
Production Linked Incentive Schemes (PLI) in India have been gaining traction as a policy tool to promote manufacturing and spur economic growth. The scheme, which has been adopted by many countries around the world, offers fiscal incentives to manufacturers who invest in production capacity and technology upgrades in order to increase their competitiveness in the market.
In India, the government introduced the Production Linked Incentive Scheme in April 2020, with the aim of promoting manufacturing activities in the country. The scheme, which was part of the Atmanirbhar Bharat Abhiyan announced by Prime Minister Narendra Modi, is aimed at making India a global manufacturing hub by providing incentives for investments in the manufacturing sector.
Under the PLI scheme, the Government of India provides incentives to companies investing in the manufacture of specified goods or services. The main objectives of the PLI scheme are to create employment opportunities, attract investments, and boost exports.
The objectives are achieved by providing fiscal incentives to domestic companies, including those engaged in the manufacture of products that are essential to the Indian economy.
PLI covers various sectors, including mobile manufacturing, electronic components, drug intermediaries, medical devices, automobiles, pharmaceutical drugs, specialty steel, telecom, networking, electronic products, white goods, food, textiles, solar PV modules, advanced batteries, and drones.
The scheme has helped to spur growth in the manufacturing sector and has attracted significant investment from both domestic and foreign companies. It is expected that the scheme will continue to play an important role in the development of the Indian economy in the coming years.
Deep dive
The Indian government’s 2020 Production Linked Incentive (PLI) scheme, designed to boost production in six sectors, has fallen short of expectations, with only a fraction of the intended subsidy being disbursed.
The scheme, which was expected to provide an average 5% subsidy, has shown a lower boost of around Rs 60,000 crore, prompting government officials to review the scheme and identify its deficiencies.
The PLI scheme faces challenges in implementing across different sectors, but notable successes include attracting Apple to India for domestic sales and exports. Incentives are currently disbursed in eight sectors, with six sectors holding hope for future progress. Four sectors are experiencing slow pick-up, and two are in “advanced stages,” but further clarification is needed.
To understand the context, it is crucial to consider the structural changes in India’s economy. Despite pro-business reforms introduced in 1991, India has struggled to significantly increase the share of the secondary sector, particularly manufacturing, in its GDP. The share of the secondary sector in GDP has only marginally increased from 24.7% in 1991-92 to 27.3% in 2019-20, just before the COVID-19 pandemic. The manufacturing sector has remained at around 17% of GDP.
Unlike the classical development pattern observed in many affluent countries, India has followed a different trajectory. At the time of independence, agriculture was the dominant sector, and the services sector was already larger than the industry. Over time, the services sector continued to grow, while agriculture’s share declined. The industrial sector experienced rapid growth in the first 15 years but eventually slowed down, remaining relatively unchanged after 1980. By 1980, the services sector had become the largest, surpassing the industrial sector.
Policymakers have emphasized the need to boost the manufacturing sector, introducing initiatives like the National Manufacturing Competitiveness Council and National Manufacturing Policy. However, by 2016, manufacturing only contributed 17% to India’s GDP, and job creation remained limited. A 2011 policy document emphasized the role of small and medium enterprises (SMEs) in enhancing manufacturing capacity and creating jobs. The micro sector, which accounts for 97.5% of MSME employment, has been overlooked, leading to stagnation in the manufacturing sector.
There is an urgent need to address the challenges faced in boosting the manufacturing sector and providing support to the MSMEs, particularly the micro sector. A thorough review of the PLI scheme and its implementation, taking into account the concerns raised by various stakeholders, is essential to ensure the effective promotion of manufacturing and the overall growth of the Indian economy.